All Perspectives

AllPerspectives

41 Perspective(s) trouvé(s)
    09 April 2021
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    In many countries the number of new Covid-19 cases has begun rising again, forcing governments to maintain or tighten health restrictions. This is the case for the Eurozone, among others, where a true rebound in growth and demand has been postponed yet again. The timing of the recovery will depend essentially on the effectiveness of restrictive measures and the acceleration of vaccination campaigns, but also on spillovers effects with some of its trading partners whose economies are picking up more rapidly. The United States is one such country thanks to its successful vaccination campaign and the enormous recovery plan that has just been launched. America’s influence is not limited to providing greater opportunities for European exporters. The upturn in US bond yields has partially carried over to long-term rates in the Eurozone, pushing them higher. This trend largely reflects higher inflation expectations, although the Federal Reserve is convinced that the surge in inflation will be short-lived. Companies and households should welcome the bond markets’ jitters, which clearly signal the sentiment that the economy really is improving. 
    The US economy has taken off. Bolstered by the easing of the Covid-19 pandemic as much as by unprecedented fiscal support, GDP will soar by at least 6% in 2021, surpassing the pre-crisis level of 2019. Inflation will accelerate and temporarily overshoot the Federal Reserve’s 2% target. Nonetheless, the central bank will not deviate from its accommodating stance. The Fed’s top priority is  employment, which continues to bear the scars of the crisis and has a long way to go before making up for all of the lost ground. As a result, monetary conditions will remain accommodating, both for the economy and the markets, even at the risk of encouraging some excessive behaviour.
    At the end of the annual “Two Sessions”, China’s major political event, Beijing announced its economic targets for 2021 as well as the priorities of its new five-year plan. By setting this year’s real GDP growth target at simply “more than 6%”, which is lower than forecasts, the authorities are signalling that the economic recovery following the Covid-19 crisis is no longer the main focus of concern. In the short term, they will continue to cautiously tighten monetary policy and gradually scale back fiscal support measures. Above all, the authorities have affirmed their medium-term development strategy, which aims to boost innovation and drastically expand China’s technological independence.
    As in other countries the world round, Japan reported a record-breaking recession in 2020 and the lack of consumer confidence, stifling domestic demand, could slow the dynamics of its economic recovery. Japan’s vaccination campaign has been relatively slow, notably compared to the United States, but the country was not hit as hard by the pandemic as other countries. Faced with expectations of sluggish demand, Japanese companies will continue to be reticent about making investment decisions. This outlook could undermine Japan’s already weakened growth potential. Tighter financing conditions would be especially harmful, and the Bank of Japan will remain vigilant in the current environment of rising interest rates.
    The pandemic continues to spread rapidly within the Eurozone member states, and many uncertainties remain. Yet the most recent economic data are encouraging. Far from claiming victory, these signals nonetheless raise expectations of an accelerated economic recovery as of H2 2021. The greatest hope lies in the successful rollout of vaccination campaigns among national populations. The authorities will remain at the bedside of an ailing Eurozone economy, ready to help through public policies while trying to avoid any tightening moves that might hamper the recovery process. In terms of monetary policy, for example, Christine Lagarde announced that the ECB would step up the pace of securities purchases, which means that financing conditions are being closely monitored.
    After a difficult start of the year, business cycle indicators improved markedly in March on the hope that the worst of the Covid-19 crisis is behind us. GDP is projected to reach the pre-Covid-19 level by the end of 2022. Many of the government support measures will remain in place this year. Fiscal policy for 2022 will depend on the outcome of the general election in September. After a significant weakening of the Christian-Democrats in the polls, a coalition between Greens, social-democrats, and liberals cannot be excluded. The business sector has been severely weakened during the crisis, but this is unlikely to have long-term consequences.
    Contrary to what we were led to expect in late 2020, the discovery of vaccines did not end the stop-and-go nature of the recovery. In early 2021, due to the emergence of variants and the slow pace of the vaccination campaign, the exit from the crisis continues to follow a jagged trajectory. The light at the end of the tunnel seemed to be getting closer (Q4 2020 GDP did not decline as sharply as feared; a technical recession was apparently avoided in Q1 2021, with feeble but positive growth) but now it is fading again (the rebound has been pushed back until Q3, with Q2 growth verging on zero, and it could even slip into negative territory). The strong upturn in March confidence surveys is good but fleeting news, because it does not integrate the recent series of tightening of lockdown measures. We should expect a relapse in April before a turnaround in May, which we hope will be sustainable this time, thanks to the acceleration of vaccinations and support from the policy mix. The expected rebound in H2 would lift growth to an average annual rate of 6.1% in 2021, followed by 4.4% in 2022.
    In 2020, real GDP fell by 8.9%, with almost 2.5 million of full-time equivalent jobs lost. The decline in consumption was the main driver of the recession, accounting for three fourths of the economic downturn. Stagnating incomes and the lack of confidence increased households’ propensity to save. The services sector was the most severely affected by the crisis, with value added declining by 8.1%, while manufacturing benefitted from the moderate recovery of exports. The problems raised by the pandemic combined with -and worsened- structural issues that had been slowing down the country’s economic growth up to now. In the years to come it will be hard to implement a solid growth pattern without decisive interventions that would foster innovation and productivity.
    Economic growth remains extremely fragile in early 2021. In addition to the Covid-19 pandemic, Spain was hit by Storm Filomena in early January, which has had a direct negative impact, notably on consumption: both automobile and retail sales plummeted this winter. We now expect GDP growth to be flat in Q1. Even so, the economy could rebound strongly either this spring or more certainly by summer, although we cannot completely rule out the downside risks associated with the UK variant and a possible fourth wave of the coronavirus in Spain. We are forecasting real GDP growth of 5.9% in 2021 and 5.6% in 2022, following a record contraction of 10.8% in 2020.
    Thanks to healthy government finances and a light lockdown strategy, the Netherlands weathered the crisis better than the surrounding countries. Nevertheless, the economy was in a mild recession in Q1 2021. Economic sentiment indicators point to rapid recovery in the second half of the year. Despite the clear victory of the outgoing government at the general election in March, the formation of a new coalition is in turmoil. Doubt has increased whether Mark Rutte can lead his fourth government in succession. The main task of the coalition is to put a recovery programme on the rails.
    The Belgian economy shrunk by 6.3% in 2020. This amounts to the biggest post-war decline on record. A better-than-expected fourth quarter pushed the final numbers up somewhat and will have a positive effect on the yearly growth rate for the whole of 2021, which we see at 3.7%. Consumption suffered during the second lockdown at year’s end and is expected to dip again in April, as the government reinstated shopping on appointment only and instructed schools to extend the Easter holiday break. Unemployment increased significantly but less than was feared and the long-anticipated wave of bankruptcies hasn’t quite materialised so far. Tough choices lie ahead for the multi-party government, which should also focus on reining in its budget deficit in the years to come.
    Portugal was one of the European countries hit hardest by the third wave of the coronavirus pandemic this winter. The government reinstated a “strict” lockdown that drastically reduced the spread of the virus. A very gradual reopening plan was launched on 15 March and will end on 3 May. Hopes for a solid economic recovery hinge on the vaccination campaign currently underway, but like elsewhere in the European Union, it is progressing at a slow pace. The success of the UK vaccination programme nonetheless raises promising prospects for the recovery of Portugal’s tourism sector, which is highly dependent on British tourists. Real GDP could rebound by as much as 5-5.5% in 2021, after contracting by 7.6% in 2020.
    Gambling has risks, but sometimes you win big. No stranger to risky gambles (Brexit, herd immunity to Covid-19…) the UK Prime Minister, Boris Johnson, can now claim that one of his wagers – betting early and big on vaccines – has allowed his country to be amongst the first to see the light at the end of the tunnel. Having been in strict lockdown since the beginning of the year, and whilst also suffering from a collapse in trade with the European Union, the economy now seems to have touched bottom; economic surveys and mobility reports promise better days ahead. Both fiscal and monetary policy will help support the recovery, before thoughts move to addressing the deficit, with the first turn of the screw expected in 2023.
    After a second, particularly long and severe wave of Covid 19 in late 2020, Sweden has been dealing with a third wave of the pandemic since mid-February. Although the vaccination campaign is unfolding satisfactorily, the resurgence of the pandemic risks pushing back the expected profile of the recovery. Monetary and fiscal policy will remain accommodating as long as necessary.
    With relatively few deaths and only a mild decline in GDP in 2020, Denmark has been fairly resilient in the face of the Covid-19 pandemic. To counter a second wave of the virus, more restrictive health measures had to be introduced in early 2021, which will push back the timing of the recovery, albeit without jeopardising it. With its vaccination campaign unfolding smoothly and the extension of fiscal support measures, the country is well positioned to exit the crisis. To better control the krone’s peg to the euro, Denmark’s central bank has made major adjustments to its monetary policy.
    17 December 2020
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    Until the very end, 2020 has been a difficult year, to say the least. However, there are reasons to be cautiously hopeful about the economy in 2021. Vaccination should reduce the uncertainty about the economic outlook. Ongoing fiscal and monetary support is also important. However, more than ever, caution is necessary in making forecasts. Reaching herd immunity may take longer than expected and some of the economic consequences of the pandemic may only manifest themselves over time.
    The 46th president of the United States, Joe Biden, will face a difficult mandate. At the time of his inauguration on 20 January 2021, he will inherit a sluggish economy, as the Covid-19 pandemic continued to worsen with a human toll of tragic proportions. Looking beyond the health crisis, the new Democratic administration will have to act on political and social stages that have never seemed so antagonistic at the dawn of a new decade. With his reputation as a man of dialogue, Joe Biden will need all of his long political experience and skills in the art of compromise to try to heal America’s divisions.
    Economic activity has rebounded rapidly since March and has gradually spread from industry to services. Infrastructure and real estate projects continue to drive investment, but it has also begun to strengthen in the manufacturing sector as well, encouraged by solid export performance. Lastly, private consumption is still lagging, but yet has picked up vigorously since the summer. Whereas fiscal policy should continue to be growth-supportive in the short term, the monetary authorities are expected to adjust their priorities and return their focus on controlling financial risks. Credit conditions should be tightened slowly, especially via the introduction of new prudential rules. Corporate defaults are likely to increase alongside efforts to clean up the financial sector.
    As in other economies across the globe, Japan will report a record-breaking recession in 2020. The path to a full economic recovery will be probably longer because growth would remain very subdued. According to our forecast, Japanese GDP will not return to pre-crisis levels before the end of 2022. Domestic demand remains sluggish due to corporate investment, although household consumption seems to be picking up again. For the moment, Japanese exports are benefiting from China’s robust economic rebound. Fiscal policy, the front line of defence, will continue to receive support from the Bank of Japan’s monetary policy. There are also talks of a new fiscal package.
    The resurgence of the Covid-19 pandemic halted the Eurozone’s economic recovery. It looks like year-end 2020 will be harder than expected due to new social distancing measures and lockdown restrictions set up in most of the member states. Industrial output remains low compared to pre-crisis levels and companies in the tradeable services sector continue to be at the forefront of restrictions. As to the first half of 2021, uncertainty is still high. Faced with this environment, the European Central Bank (ECB) is expected to announce new monetary stimulus measures following its 10 December meeting as fiscal support measures are gradually reduced.
    The second lockdown interrupted an already stalling recovery. However, the business climate is likely to improve soon on the expectation that several vaccines might soon be available. Inflation is currently in negative territory because of the VAT cut, but will soon turn positive again once the measure expires on 1 January 2021. Because of the second lockdown, the 2021 budget will show a larger deficit than assumed in September, EUR180 bn or 5.2% of GDP. In Q2, the household savings rate rose to 20.1%, a new historical high. Once the pandemic is over, the savings rate could drop considerably if consumers catch up on postponed purchases. 
    The huge recessionary shock in H1 was followed by an equally spectacular rebound of economic activity in Q3, with an 18.7% jump in real GDP, although it will remain short-lived. The recovery has turned out to be W-shaped: GDP is expected to fall again in Q4 because of lockdown measures reintroduced on 30 October to tackle the second wave of the covid-19 pandemic. However, the second V should be less pronounced than the first: the decline should be smaller because the lockdown measures are less stringent, and the rebound should also be smaller because restrictions will remain in place and the economy is weakened. There is still a long way to go, but the arrival of vaccines means that there is light at the end of the tunnel. The first positive effects of the France Relance plan should also underpin growth, possibly taking GDP back to its pre-crisis level in 2022.
    Following an impressive decline in the first half of 2020, the Italian economy rebounded over the summer. Value added rose strongly in construction and manufacturing, while the recovery in the services sector was less substantial. Favourable indications also come from house prices invalidating the darkest scenario depicted at the beginning of the pandemic. To contain the second wave of infections, the Italian Government has taken restrictive measures, with negative effects on activity. The economy is expected to decline in Q4 again. This contraction should be less significant than in the first half of the year, with only a moderate impact on 2020 growth, while the carry- over in 2021 should be more sizeable.
    Forecasts made at the start of the year will probably turn out to be accurate. Spain is set to be the Eurozone’s economy hardest hit by the Covid-19 epidemic. We forecast GDP to shrink by 11.8% in 2020 before rebounding by 7.0% in 2021. The social situation has worsened again this year, forcing the government to introduce new large-scale welfare benefits (e.g. minimum living income), which will be reinforced in 2021. Spain’s huge €140 billion stimulus plan will support the recovery, should raise the country’s potential growth and create jobs. But the structural budget deficit is widening. Once the Covid-19 crisis is over and the recovery underway, Brussels will intensify the pressure on the Government to speed up certain key reforms, and in particular regarding the country’s pension system.
    We expect the Belgian economy to lose 7.2% of its size this year, followed by a 3.8% increase next year. After a strong recovery in the third quarter, private consumption is expected to decline again at the end of this year, but not as much as during the first lockdown. So far, structural damages seem to have been mainly avoided, with bankruptcies close to their normal level and unemployment rates stable since the beginning of the year. Government support measures have no doubt played a crucial role in this but once these measures are discontinued, some long term scarring will take place.
    The government decreed a second lockdown in November due to the rapid rise in Covid-19 infections. Business indicators point to a fall in activity. Thanks to the short-time work scheme, unemployment has only risen moderately. Moreover, inflation has remained at a relative high level compared to other eurozone countries. In 2021, fiscal policy remains very accommodative and the deficit might only shrink to 6.3% of GDP. The economy is projected to rebound by 3.5% in 2021 compared with a slump in 2020 (-7.5%). A major downside risk is the increased indebtedness of the non-financial corporate sector. 
    In Q2 2020, Finland stood out from the rest of Europe as the country that reported the smallest decline in GDP – “only” –4.4%. Yet the ensuing recovery was less vigorous than for its EU neighbours, and Finland will surely continue to underperform in the months ahead. Even so, the Finnish economy is still one of the most resilient in Europe, thanks notably to the relatively feeble spread of the virus and robust support from the fiscal and monetary authorities.
    Greece’s economic recovery will be fraught with uncertainty in 2021. The Covid-19 hit to activity could last longer in the tourism industry – a key sector for the country – than in other sectors. The decline in tourist inflows in summer 2020 has limited significantly the rebound in Q3 GDP, which was much weaker than in other European countries. Some confidence indicators, particularly regarding the unemployment outlook, have worsened during the autumn. The conservative government plans to use the large amounts of money allocated by the European recovery fund to finance its stimulus plan, details of which will be finalised early next year. Despite that, public debt is likely to remain above 200% of GDP by the end of 2021, which is very worrying from a long-run perspective.
    The record fall in UK GDP in the second quarter gave way to unprecedented growth in the third, and the news that an effective vaccine against Covid-19 will soon be widely available suggests that the economy could start its definitive recovery in 2021. However, the UK is not out of the woods yet. Given that a second national lockdown was introduced in England in November, there is little doubt that economic activity will drop again in the fourth quarter. Moreover, the strength of the recovery is, because of Brexit, more uncertain than elsewhere. This not only because of the UK’s decision to leave the EU’s single market and customs union, but also due to continued uncertainty over whether a free-trade agreement will be found. 
    Since March 2020, Sweden has adopted a more relaxed approach to the COVID19 outbreak as no lockdown has been imposed to the population. However, the recent pick up in new infections could slow the recovery down in Q4 2020. Pervasive uncertainty will continue to hamper exports and corporate investment, while household consumption is fuelling the economic recovery. In 2021, the Riksbank will maintain and expand its vast asset purchasing programme. New expansionist measures are expected to bolster an already accommodating fiscal policy. 
    Norway was not hit as hard by the Covid-19 pandemic as most its European neighbours. Moreover, the economy has been able to count on considerable support from the fiscal and monetary authorities. In its draft budget for 2021, presented in October, the government has pledged to maintain an expansionist policy, even if spending will logically not be as high as in 2020. What’s more, faced with an upturn in Covid-19 cases and tighter restriction measures, the central bank has adopted a more conciliatory tone. 
    The Danish economy has quickly rebounded after the reopening of the borders but a complete catch-up will take time since the resurgence of the Coronavirus epidemic keeps the country’s economic situation uncertain. Services exports were hard hit by the crisis in 2020, but are offset by a surge in Danish household consumption, supported by government measures. Fiscal policy should remain accommodative in 2021 and the Central Bank of Denmark will continue to defend its peg with the euro.
    01 October 2020
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    For several weeks now, the improvement in economic data has been slowing down. On the one hand, this loss of momentum is unsurprising as it followed a substantial rebound which could not last. On the other hand, this fall could reflect the economic reaction to the rise in the number of new Covid-19 cases in many countries. Furthermore, the level of uncertainty which remains very high, affecting households and businesses, should also play a role. As a result, monetary and especially fiscal policies remain crucial in ensuring that the recovery continues pending the release of a vaccine.
    Social distancing and lockdown measures implemented to combat the Covid-19 pandemic severely damaged the US economy in Q2 2020, resulting in a record 9.1% decline in GDP. The ensuing recovery is still incomplete and inequitable, as many of Americans still unemployed because of the pandemic are from low-income categories. The health toll is getting worse, and the United States is the country with the highest number of deaths (nearly 200,000 victims to date). President Donald Trump long played down the disease but must now deal with consequences during the run up to the presidential election on 3 November. Although the incumbent president is lagging in the polls, the election’s outcome is still highly uncertain.
    The economy continues to recover. Initially driven by a rebound in industrial production and investment, the recovery broadened over the summer months. Exports have rebounded and activity has also picked up in the services sector. Yet it continues to be strained by the timid rebound in household consumption, which is far from returning to normal levels. The unemployment rate began to fall right again after the end of lockdown measures, but this decline has been accompanied by an increase in precarious jobs and large disparities, with the unskilled and young college graduates being particularly hard hit.
    It will take a long time for Japan to erase the economic shock of the Covid-19 pandemic. Even though lockdown measures were less restrictive than in other countries, Japanese GDP is poised for a record contraction in 2020. The expected rebound could be mild. Household confidence and business activity indicators have stagnated, sending mixed signals about the strength of domestic demand. The Covid crisis is bound to accentuate the weaknesses of the Japanese economy: sluggish growth, low inflation and record-high public debt. Prime Minister Shinzo Abe’s resignation is unlikely to lead to any major policy changes as Japan continues to pursue expansionist economic policies.
    After a more vigorous than expected recovery following the end of lockdown, the trend now seems less energetic. There is still lost ground to make up and the end of the year, beset by uncertainty on the health and economic fronts, is likely to see a marked decline of growth. In our central scenario, there is no return to pre-crisis GDP level before the forecast horizon at the end of 2021. Coupled with this, deflationary pressures are building, and the strengthening of the euro intensifies this dynamic. So far the European Central Bank has been patient, but has indicated its willingness to take new measures. If the current situation persists, an extension of emergency monetary measures, in terms of both size and duration, looks likely.
    A strong rebound is expected in Q3 (7.2%) following the progressive lifting of restrictions. Nevertheless, the recovery is likely to remain slow and bumpy at times, at least until there is a Covid-19 vaccine or a better treatment. Thanks to the widespread use of furlough, the labour market has held up reasonably well. However, the scheme may also have been delaying a necessary restructuring, which could weigh on the long-term performance of the economy. The huge increase in public spending to ease the economic consequences of the virus have forced the authorities to activate the debt brake exemption clause. The excess debt will be repaid over 20 years starting in 2023.
    After a rapid restart in May and June, the economy was back to 95% of its normal level in August. However, the improvement is now slowing as the automatic catch-up effects fall away and as substantial disparities between sectors and persistent public health constraints and uncertainties remain in play. Even so, Q3 is expected to see a substantial rebound (of around 15% q/q). It will be in Q4 that growth is likely to fall back like a soufflé. This period will determine the next chapter in the recovery. Hence the significance of the stimulus package in its double role of softening the blow from the crisis and boosting the recovery now under way. We estimate that this package will add 0.6 of a point to growth in 2021, taking it to 6.9%, after a contraction of 9.8% in 2020.
    In Q2 2020, real GDP fell by 12.8%, dropping down to values recorded in the 1990s. A weakened domestic demand was the main driver of the recession, with households reducing their expenditure and investment falling by 15%. The contraction became widespread. The real estate sector sent mixed messages: in Q1 2020 prices went up while transactions experienced a sharp decline. Latest data have signaled a rebound of the economy, even if the scenario remains uncertain. The strength of the recovery will depend on the behaviour of businesses and households, which will in turn be affected by the evolution of the pandemic. In the real estate sector, both prices and transactions should experience a sharp decline by the end of the year. Transactions should only partially recover in 2022. 
    The Spanish economy registered a record contraction of 22.7% in the first half of 2020. With the public deficit likely to rise above 10% of GDP this year, the government faces some difficult decisions, notably on the terms and conditions of its temporary layoff scheme (ERTE). The recovery in industrial production since the easing in lockdown restrictions in May is encouraging. However, this only partially compensate for the slow pick-up in activity in other sectors. The final quarter of 2020 will be a pivotal moment. A substantial programme of support for employment and investment (under the recovery package announced this autumn) is needed, while narrowing down support more specifically towards the sectors lastingly affected by the crisis.
    Economic activity contracted less than in the neighbouring countries (-8.5%). Hard data confirm a rebound in Q3, although social distancing rules are weighing on activity, in particular in services. Thanks to the substantial financial buffers, the government can cope with the considerable costs caused by the Covid-19 pandemic. In 2021, the deficit is projected at around 5% of GDP and the debt ratio may end up just above 60%. The centre-right coalition is likely to lose the majority at the next general election in March 2021. If the social democrats and greens do well, a purple coalition would be possible.  
    We expect the Belgian economy to lose 7.5% of its size this year and grow by 4.6% next year. Consumption is on course for a strong recovery but corporates remain hesitant to invest, with government interventions expected to pick up some of the slack. Government formation talks are likely to have entered a final phase. The new coalition will have its work cut out for it, as both supportive measures in the short term and a deficit-reduction program in the medium term are needed.  
    Finland’s economy was showing signs of weakness even before the Covid-19 pandemic started – indeed, GDP contracted a bit in the fourth quarter of 2019. In spite of that, the economy has been one of the most resilient in Europe. That is notably because the pandemic has been relatively contained, allowing the authorities to impose softer restriction measures. Another reason is the substantial support provided by the government.
    Despite managing well the epidemic, Portugal has experienced a severe economic shock in Q2. Real GDP plunged by 13.9%, pulled down by sharp falls in goods and services exports (-36.1% q/q) and private sector consumption (-14.0% q/q). Investment dropped (8.9% q/q). The country has been heavily impacted by the collapse in tourism inflows and foreign activity, particularly in Spain. External factors could also hamper the recovery, particularly given the surge in new Covid-19 cases in Spain. Nevertheless, the improvement in public finances operated in recent years should translate into a government deficit for 2020 smaller than in other European countries – around 7.0% of GDP according to government estimates. This provides relatively more leeway to support the recovery.
    While UK GDP has bounced back since May and has made up half of lost ground caused by the Covid-19 pandemic, the economic crisis is still far from being over. In particular, concerns are mounting over the labour market, as the government’s furlough scheme will be terminated in the next few weeks. Meanwhile, the end of the transition period that maintains the UK in the EU single market and customs union is coming up fast. Disagreements during the negotiations raise fears about the UK leaving without a trade agreement, which could have an even bigger impact on the economy in the long term than the current crisis.
    Not only was Norway affected by the Covid-19 pandemic, but the country also had to face a big fall in the price of its main export: oil. Nevertheless, these two shocks have been cushioned by the structure of the Norwegian economy and the authorities’ fiscal and monetary response. The country’s economy is now one of the best positioned to return to its pre-pandemic levels. Indeed, it is already showing signs of improvement.
    15 July 2020
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    The easing of lockdown measures has caused a significant improvement in business sentiment and a mechanical rebound in activity and demand. In the near term, the narrowing of the gap between observed and normal activity levels should gradually lead to less spectacular growth numbers. These are underpinned by pent-up demand, monetary and fiscal policy support and the possibility for households to use the extra-savings accumulated during the lockdown. A lot will depend however on how uncertainty evolves. The health situation is not under control in certain countries and there are concerns about the risk of a flare-up. Households face income uncertainty due to bleak labour market prospects. Against this background, companies may tune down their investment plans.
    In spring 2020, partially paralysed by the Covid-19 pandemic, the US economy entered the worst recession since 1946. Global activity contracted by more than 10% in Q2 before picking up slightly since the month of May. The question is how much of the lost ground can be recovered. With the approach of summer, business surveys are improving and the equity markets are rebounding, signalling rather optimistic expectations, possibly excessively so. Bolstered by the Federal Reserve’s liquidity injections, the markets could be underestimating the risk of corporate defaults, especially given their increasingly heavy debt loads. The latest statistics on the propagation of the virus are not good.
    The economy has been recovering gradually since March, and the rebound in real GDP should be strong enough to enable it to recover rapidly the ground lost in the first quarter. Yet the shock triggered by the pandemic and the ensuing lockdown measures has severely weakened some sectors (such as export-oriented industries), some corporates (notably micro-enterprises and SMEs) and some households (especially low-income earners). The central bank has cautiously eased credit conditions and the government has introduced a stimulus plan estimated at about 5 points of GDP for 2020. Public investment in infrastructure projects remains the instrument of choice, but direct support to corporates and households is also expected to boost private demand.    
    Like the vast majority of economies, Japan will go into recession in 2020. The expected rebound in 2021 is likely to be relatively mild. The latest economic indicators reveal an economic situation that is still highly deteriorated compared to normal times. Once again, massive fiscal stimulus has been set in motion. The Bank of Japan’s monetary policy, notably through the Yield Curve Control, should largely reduce the risk of higher financing costs due to the expected rise in public debt.
    Although the Eurozone member countries seem to have the first wave of the Covid-19 pandemic well under control, they are now facing major economic hardships. The most recent leading economic indicators are showing signs of a turnaround but the road ahead will still be long. It will be hard to fully absorb the loss of activity reported at the height of the crisis. Public policies will play a crucial role. In the months ahead, the probability is very high that there will be a sharp increase in the jobless rate, especially for long-term unemployment, and a series of corporate bankruptcies. The European Central Bank (ECB) is providing member states with very favourable financing conditions. A response at the European level must come through, and the Recovery Fund needs to be set up rapidly.
    With the gradual easing of the lockdown restrictions, economic activity has shown signs of rebounding. The government stimulus plan might give further impetus to growth and also contribute to lower carbon emissions. The prospect of an EU stimulus is good news for Germany’s export-oriented manufacturing sector. However, in the absence of a Covid vaccine or better treatments the recovery is likely to be bumpy. GDP is unlikely to return to its pre-Covid level before 2022
    After a massive recessionary shock, the French economy has been showing signs of recovering rather rapidly since May, raising hopes for a V-shaped recovery. Markit’s composite PMI index and household spending on goods both rebounded spectacularly, which is encouraging. But these gains were largely automatic and will lessen as the catching-up effect wears off. To return to pre-crisis levels, it will probably take longer to close the remaining gap than it took to regain lost ground so far. There are several explanations: sector heterogeneity, ongoing health risks and the scars of the crisis. We foresee a U-shaped recovery (-11.1% in 2020, +5.9% in 2021). The risks seem to be well balanced, thanks notably to support measures that have already been taken or are in the pipeline.
    The outbreak of Covid-19 took hold in Italy earlier than in other EU countries, with strong negative effects on the economy. In Q1 2020, real GDP fell by 5.3%. The contraction affected all economic sectors: manufacturing, services and construction. Domestic demand had a negative contribution (-5.5%). Italian households become extremely cautious, reducing expenditures more than income: the propensity to save rose to 12.5%. The pandemic has dramatically hit the labor market: disadvantaged categories, such as low skills workers, those with precarious contracts and young people, are the most severely affected by the lockdown.
    The unprecedented economic contraction in H1 2020 raises serious doubts about the upcoming recovery. Although the reopening phase has proceeded smoothly so far, the recovery in employment was very small in June. Tourism remains under the threat of a resurgence of the Covid-19 epidemics in Europe. The swelling public deficit will force Prime Minister Pedro Sanchez to design a tight recovery package that balances between short-term emergency measures and long-term investments. This difficult equilibrium is likely to heighten the tensions in the governing coalition between Podemos and the socialist party. Subsidies allocated as part of the European Recovery Plan would give Spain some fiscal leeway, but the final terms and amount of the funds are yet to be finalised.     
    We expect GDP to shrink 11.1% this year and grow by 5.9% next year. The unemployment rate could reach 9%, its highest level in 22 years. Different branches of the government have announced measures to counter the impact of the covid-virus but federal government formation talks are still ongoing, which complicates matters. As public debt is expected to come in at 123% of GDP by the end of the year, the room of maneuver is limited, but the need to support the economy will take priority, at least for now.
    Despite successfully managing the Covid-19 pandemic, Greece will not avoid a severe recession in 2020. The tourism industry – which accounts for nearly 20% of the country’s GDP – offers no guarantee for a solid recovery. The prospect of a resurgence in contamination in Europe will weigh on the tourism sector in the coming months. The Greek banking system will further weaken, and public debt will rise sharply. That said, the European Central Bank (ECB) has launched the Pandemic Emergency Purchase Programme (PEPP) in March, which allows the ECB to purchase Greek sovereign debt. This has kept a lid on sovereign rates. This difficult context may entice the government to draw a recovery plan that targets strategic sectors less linked to the tourism industry.
    Due to the late implementation of lockdown measures, the UK was hit hard by the Covid-19 pandemic. Consequently, the country is reopening after its European neighbours, and its economy has been particularly affected. The return to pre-crisis levels will therefore be long and difficult. What’s more, the risk of a protracted crisis is all the greater due to two major threats looming on the horizon: a second wave of the pandemic requiring lockdown measures to be imposed again; and failure to negotiate a free-trade agreement with the European Union before the end of the year.
    After the deepest recession in recent history, economic activity is turning up again due to the gradual easing of the lockdown measures in Switzerland and the neighbouring countries. The exceptionally accommodative monetary and fiscal policy stances are also contributing to the recovery. SMEs have made use of the special loan programme and employees have benefitted from the short-time work scheme. Nevertheless, the recovery is likely to be slow, and economic activity is unlikely to return to pre-crisis levels before end 2022. The government is confident that the Covid-related debt can be repaid without raising taxes.
    At first sight, Sweden ranks among the countries best positioned to face the global economic crisis triggered by the Covid-19 pandemic. The government’s restrictive measures were not as stringent as in most other developed countries (shops and restaurants remained open, for example), the Swedish economy does not have much exposure to the hardest hit sectors, and the authorities have comfortable policy leeway. Yet the country also presents some vulnerabilities that make us less optimistic about its capacity to rebound. Among those are its dependence on global trade and households’ financial situation.
    Faced with the Covid-19 pandemic, the authorities rapidly imposed strict protective measures that effectively maintained the health crisis under control. The economy was also in a relatively good position at the beginning of the crisis – notably thanks to low unemployment and public debt – and fiscal as well as monetary support measures were quickly introduced by the government and the central bank. With all that in mind, the OECD estimates that Denmark will be one of the most resilient economies in 2020, forecasting a fall in GDP “limited” to 5.8%.
    08 April 2020
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    The COVID-19 pandemic has caused a sudden stop in an increasing number of countries. This in turn had led to international spillovers via a decline in foreign trade and an increase in investor risk aversion triggering a global rush for dollar liquidity and a surge in capital outflows from developing economies. A forceful reaction has followed in major economies in terms of monetary and fiscal policy in an effort to attenuate the impact of the pandemic. The near-term dynamics of demand and activity will entirely depend on the length and severity of the lockdown. Once the lockdown has ended, the recovery is likely to be gradual and uneven and policy will have to shift from pandemic relief to growth-boosting measures, thereby putting additional pressure on public finances.  
    The American people and the US economy will no longer be spared the coronavirus pandemic, no more than any other country. Arriving belatedly on US soil and long belittled by President Trump, the virus is now spreading rampantly, to the point that WHO is now preparing to declare the United States the pandemic’s new epicentre. With its federal structure, the US has taken a scattered approach, leaving each state to decide whether or not to introduce lockdown measures. Although the White House has closed the country’s borders (to the European Union and Canada, among others), it was reluctant to restrict domestic movements of goods and people. Foreseeing recession, the markets have plunged and the central bank has launched a veritable monetary “Marshall Plan”.
    China’s population and its economy were the first to be struck by the coronavirus epidemic. Activity contracted abruptly during the month of February before rebounding thereafter at a very gradual pace. Although the situation on the supply side is expected to return to normal in Q2, the demand shock will persist. Domestic investment and consumption will suffer from the effects of lost household and corporate revenues while world demand is falling. The authorities still have substantial resources to intervene to help restart the economy. Central government finances are not threatened. However, after the shock to GDP growth, the expected upsurge in domestic debt ratios will once again aggravate vulnerabilities in the financial sector.
    The shock of the Covid-19 pandemic comes hard on the heels of a difficult second half of 2019 for the Japanese economy. Like many others, the country is exposed to the economic fallout from this crisis. Its significant economic dependence on China, for imports, exports and tourist flows, further weakens the Japanese economy. The latest economic indicators suggest that the shock will be important. Japan will thus go into recession this year. Lacking adequate room for manoeuvre on the monetary front, fiscal policy will need to provide support. To this end, the Abe government would be preparing a major stimulus package.
    The Covid-19 pandemic has triggered a recession in the Eurozone that looks likely to be deep but short-lived. After a difficult year and a half on the economic front, the Eurozone was showing some resilience and was even beginning to show signs of stabilisation. The current shock – in demand, supply and uncertainty simultaneously – has completely changed the outlook. The health measures taken- which have been necessary to protect the population from the virus- have created the conditions for a recession. Monetary and fiscal policymakers have reacted swiftly and, so far, proportionately. However, the profile of the economic recovery remains unclear and will be crucial in assessing the damage ultimately caused by the pandemic.
    The German economy has come to a standstill because of the almost complete lockdown. To fight the economic consequences, the government launched a massive stimulus plan to increase spending in the health sector, protect jobs and support businesses. Nevertheless, production losses may reach dimensions that are well beyond growth falls in previous recessions. In the worst scenario of a three-month lockdown, GDP growth could lose around 20 percentage points and 6 million people may have to join the short-time work scheme.
    Clearly, 2020 will not be another year of slow but resilient growth as we were forecasting just last quarter. We must now expect a massive recessionary shock triggered by the Covid-19 pandemic. To date, the INSEE estimates the instantaneous loss of economic activity linked directly to confinement measures at 35%, which is equivalent to slashing off 3 points of annual GDP per month of confinement. In March, the business climate was in free fall, which gives us a first glimpse of its scope. A full arsenal of measures have been deployed to mitigate the shock as best possible. According to our estimates, French GDP could contract by 3.1% in 2020, more than the 2.8% decline reported in 2009, before rebounding by 5.4% in 2021. These forecasts are highly uncertain, with risks on the downside.
    The outbreak of Covid-19 hit Italy while the economy was already contracting. The exceptional growth of infected people has brought the Italian Government to take harsh measures, that include stopping all economic activities, excluding those considered as necessary, and imposing a quarantine for the entire population. The combination of an induced supply and demand shocks is going to cause a recession, which is expected to be deep and to last at least until June. In 2020 as a whole, despite the strong support coming from fiscal and monetary policy, the Italian economy should decline by some percentage points.   
    Spain is Europe’s second hardest-hit country by the coronavirus pandemic, and is likely to suffer a sharp economic contraction this year. The economic impact remains hard to quantify. GDP is nonetheless likely to fall by more than 3% in 2020, before a recovery in 2021. The structure of the Spanish economy – turned heavily towards services and with a high proportion of SMEs – suggests that the economic shock could be greater than in other industrialised countries. Endemic unemployment could intensify, leaving a lasting mark on growth over the medium term. However, the improvement in public finances before the virus outbreak and a more stable political situation gives the government some leeway to face the crisis.
    As the country went into a selected lockdown, business confidence plummeted. To limit the economic fallout, the government announced a comprehensive package to protect jobs and businesses, its favourable budgetary position giving it sufficient firing power. Nevertheless, each month of lockdown may reduce output growth by around 2 percentage points. In the case of a rapid recovery, the GDP shrinkage could be limited to around 3.5% in 2020.
    Due to the Covid-19 virus our growth outlook declines by 5 percentage points to -3.5% for the whole of 2020, despite government measures to attenuate the impact of the epidemic. We see strong hits across almost all sectors, most notably construction and real estate related activities. Prime Minister Wilmés was empowered by a “corona coalition”, which provides a welcome if only temporary breather from government formation talks. The government so far managed this crisis in decisive fashion but eventually the bill will have to be footed.
    After what proved to be a rather mild slowdown, Portugal’s GDP growth ended up in the upper range of expectations at 2.2% in 2019. The Covid-19 pandemic will surely erase the country’s enviable performances as whole segments of the economy come to a standstill and the country sinks into a major recession in the weeks ahead. Similarly to its European counterparts, the Costa government is steadily implementing a series of measures to preserve the economic system during the crisis and safeguard the country’s capacity to recover.
    Now a global phenomenon, the Covid-19 pandemic reached the United Kingdom relatively late and did not give rise to immediate protective measures. Having initially opted for a ‘herd immunity’ strategy, Boris Johnson’s government finally decided, on 24 March, to introduce a national lockdown. As in Italy, France and indeed generally across continental Europe, people’s movements and interactions are now limited in the UK. The disease, meanwhile, has spread rapidly, on a trajectory similar to that seen in the worst affected countries. Faced with the health and economic threats created by the pandemic, the government and the monetary policy authorities have introduced an exceptional package of support.
    After the economic slowdown was confirmed in 2019, the global shock of the coronavirus pandemic will probably drive Sweden into recession in 2020. The evaporation of global demand, notably from the European Union and China, will trigger a drop-off in exports, and production channels will temporarily freeze up. Investment and consumption will both be hit. The central bank has adopted unprecedented support measures while the government is devoting its financial manoeuvring room to funding a fiscal stimulus policy that supports jobs and businesses.
    With the coronavirus epidemic and its impact on oil prices, which are plummeting, the Norwegian economy is heading for a contraction in 2020. Exports, which account for 41% of GDP, are likely to be hit first. Norway’s central bank cut its key rate to nearly zero and has considerably increased NOK and USD lending, injecting liquidity into the economy while supporting the currency. The government has introduced fiscal measures to buffer the shock for companies and households.
    The Coronavirus epidemic is also sweeping Denmark, which has now introduced relatively strict lockdown measures. With its very open economy (exports account for more than 50% of GDP), GDP growth will contract in 2020. To mitigate the shock, the government has launched major fiscal support measures, comprised notably of paying compensation for all or part of wages for a 3-month period. The central bank is ensuring DKK and EUR liquidity, after signing a swap arrangement with the ECB.
    Economic activity will plummet under the impact of the Covid-19 pandemic, but not only via the export channel. The recession could become more virulent if household consumption and production channels were also to freeze up. In addition to the ECB’s monetary policy support, the government will also try to use fiscal policy to buffer the shock and limit the decline in employment.
    24 January 2020
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    In recent months, the global manufacturing cycle has been bottoming out whereas in services a slight uptick has been noted. In addition, two major sources of uncertainty have seen a positive development: the US and China signed a trade deal and the UK and the European Union can at last start negotiations about their future relationship. Very accommodative central bank policy has contributed to buoyant market sentiment. The combination of these three factors - stabilisation of business sentiment, decline in uncertainty, supportive financial environment - implies conditions are met to see some uptick in growth. Nevertheless, caution prevails in this assessment, if only because later on this year, uncertainty may very well increase again.
    The dichotomy between economic and market trends has widened, in a context of accommodating monetary policy and rising corporate debt. Risks taken by institutional investors (pension and investment funds, life assurance companies) have increased, as has the vulnerability to any adverse shocks or changes in expectations. 2020 – an election year – is unlikely to bring calm. Welcome as it is, the truce in the trade war with China takes in the bulk of existing tariff increases, without producing any fundamental changes in the position of the US administration and its limited appetite for multilateralism.
    In 2019, economic growth slowed to 6.1%. Total exports contracted and domestic demand continued to weaken. The year 2020 is getting off to a better start as activity shows a few signs of recovering and a preliminary trade agreement was just signed with the United States. Yet economic growth prospects are still looking downbeat in 2020. The rebalancing of China’s growth sources is proving to be a long and hard process, and economic policy is increasingly complex to manage. Faced with this situation, Beijing might decide to give new impetus to the structural reform process, the only solution that will maintain the newfound optimism and boost economic prospects in the medium term.
    In December 2019, the Japanese authorities decided to launch a major fiscal stimulus for the years ahead. A large part of the programme will target disaster prevention after the country was hit by a series of natural disasters recently. The stimulus will also limit the negative impact of last October’s VAT hike, which probably strained private consumption in the year-end period. Buoyed in part by early purchases ahead of the VAT hike, household spending continued at a dynamic pace in Q2 and Q3 2019. The export sector, in contrast, was hard hit by the sluggish global environment. In 2020, public investment is expected to partially offset weak private consumption.
    Will the year 2020 be marked by a rebound in eurozone economic growth? More favourable signs seem to be emerging, although they have yet to show up clearly in hard data. In any case, eurozone growth is bound to remain low. In this environment, inflationary pressures will probably fall short of the central bank’s target. Beyond that, the ECB Governing Council will be tackling new issues in 2020. Christine Lagarde announced a strategic review for the Frankfurt-based monetary institution. On the agenda: cryptocurrencies, climate change, technological progress, and inequalities.
    Economic activity increased by only 0.6% in 2019, as the decline in manufacturing production was offset by increased activity in more domestically oriented sectors. In the coming two years, the economy will be supported by more accommodative fiscal policies. From Q2 2020, the pick-up in exports related to the partial lifting of uncertainties may more than compensate for easing consumption growth. Nevertheless, GDP growth is expected to remain below potential. The possible departure of the SPD from the ruling coalition forms a major political risk.
    The year 2020 is expected to follow along similar lines as in 2019, a mixed performance marked by slow but resilient growth bolstered by the strength of final domestic demand. The economy is expected to keep running at about the same rate (1.1% after 1.3%). The rebound in household consumption should gather steam, fuelled by major purchasing power gains. The dynamic pace of investment, which looks hard to sustain, is expected to slow, while sluggish global demand will continue to curb exports. The intensity of several external downside risks declined in Q1 2020, including trade tensions, Brexit, and fears of a recession in the US and Germany. On the domestic front, upside risks continue to stem from supportive economic policies while the tense social climate constitutes a risk on the downside.
    Italy continues to record a cycle of subdued activity, with the annual growth rate of real GDP slightly above zero, as a result of the feeble growth in services, the modest recovery in construction and the persisting contraction in the industrial sector. From Q1 2018 to Q3 2019, manufacturing production has fallen by more than 3%, with the strongest declines in the sector of means of transport, in that of metal products and in that of textile, clothes and leather items. Together with the short term slow down, Italy is going to face long term challenges due to the ageing population and its impact on the labour force and the pension spending.
    Although Spanish growth remains solid, it is by no means sheltered from the European slowdown. In 2020, growth is expected to continue slowing to about 1.7%, after reaching 2% in 2019. The slowdown is also beginning to have an impact on the labour market. From a political perspective, Pedro Sanchez was the winner of November’s legislative election, although he failed to strengthen the Socialist party’s position. He was invested as a prime minister in early January by Parliament and he will lead a minority coalition government alongside the extreme left Podemos. The coalition will depend on the implicit support of some regional and nationalist parties, notably the pro-independence Catalan ERC party.
    Economic activity may have substantially weakened in Q4, due to the slowdown in world trade and the nitrogen and PFAS problems. Fiscal policy should become very accommodative, although it remains doubtful if the government will succeed in implementing all the spending plans. Growth is likely to slow this year, before picking up in 2021 on the back of a stronger global economy. However, climate challenges and labour shortages continue to weigh on activity in particular in construction. Moreover, pensioners may face severe cuts because of the deteriorated financial situation of the pension funds.
    Belgian GDP growth is expected to drop to 0.8% in 2020, down from 1.3% in 2019. Domestic demand remains the key engine of growth, partially offset by a negative contribution from net trade. Private consumption growth is reduced as employment increases now at a slower pace, after 4 strong years. Investment growth is up, spurred on by public expenditures. The lack of a majority-backed government contributed to renewed fiscal slippage, which remains a key risk for the Belgian economy.
    Supported by catching-up effects, the Greek economy managed to accelerate slightly despite a slowing European environment. Confidence indices have improved strongly and the Greek state has successfully returned to the capital markets. The new centre-right government is seeking to cut taxes on labour and capital without sacrificing fiscal discipline. The recovery will be a long process, but it is on track.
    On 31 January 2020, the United Kingdom will officially leave the European Union and all of its constituent institutions. Brexit will therefore happen in law if not in fact, as, during a so-called ‘transition’ period set to end on 31 December 2020, the British economy will remain a full part of the single market and the European customs union. Goods, services and capital will continue to move freely into and out of the EU, which will continue to have legal and regulatory authority. True separation will only come at the end of this period, once the framework of the future relationship has been settled. As has been the case for some time now, this final step does not look easy to achieve.
    GDP growth slowed sharply in 2019, and this trend is expected to be confirmed in 2020. Uncertainty surrounding the business climate and international trade are straining exports and investment. Consumption is barely rising and is unlikely to revitalize growth. Despite this environment, and with inflation near the central bank’s 2% target rate, the Riksbank opted to raise its key policy rate from -0.25% to 0%. Even so, monetary policy is still accommodating.
    In a less buoyant international environment, Denmark’s small open economy managed to maintain a rather dynamic pace. Thanks to its sector specialisation (pharmaceuticals, digital, etc.), the economy has been fairly resilient despite the downturn in the global manufacturing cycle. A labour market verging on full employment and accelerating wage growth have bolstered consumption, which is still one of the main growth engines. With the Danish krone (DKK) pegged to the euro, the central bank’s monetary policy will follow in line with ECB trends, and is bound to remain very accommodating. Fiscal policy will be geared towards the ecological targets of reducing greenhouse gas emissions.
    10 October 2019
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    The slowdown of global growth has gathered pace, forcing the Federal Reserve to cut the federal funds rate on two occasions, whereas the ECB has announced a comprehensive easing package. Nevertheless, the slowdown is expected to continue. Uncertainty is pervasive. Companies question the true state of demand faced with slower growth, trade disputes, Brexit worries, geopolitical risk. Corporate investment suffers and may impact households via slower employment growth. The room to boost growth via monetary policy and, in many countries, fiscal policy has become limited, and this is another factor which could weigh on confidence. Surveys of US corporate executives point towards high concern about recession risk and the US yield curve inversion adds to the unease. However, the picture provided by a broad range of leading indicators is, at least for the time being, less bleak.
    The contraction in world trade, exacerbated by President Trump’s tariff offensive against China, has begun to spread to the United States. The economic slowdown, which can also be attributed to domestic factors, has prolonged throughout the summer of 2019, and business surveys do not suggest any improvements in the months ahead. Corporate investment will remain downbeat, while household consumption, which has been resilient so far, should begin to falter. In the face of this environment, the Federal Reserve -- which no longer provides forward guidance on upcoming policy moves – is bound to lower its key rates again.
    Since Q2 2018, Beijing has let the yuan depreciate against the dollar each time the US has raised its tariffs on imported goods from China. Yet, exchange rate policy as an instrument to support economic activity should be used moderately in the short term. There is also little room to stimulate credit given the excessively high debt levels of the economy and the authorities’ priority on pursuing efforts to clean up the financial system, the public sector and the housing market. Torn between stimulating economic growth and deleveraging, the authorities’ dilemma could get worse if recent fiscal stimulus measures do not have the intended impact on domestic demand, or if the external environment were to deteriorate further.
    Japanese GDP growth was stronger than expected in early 2019. Despite the current troubles in the export sector, for the moment domestic demand - both public and private - is picking up the slack. In the short term, two sources of concern loom over Japan’s macroeconomic scenario. First, Japan is highly exposed to the slowdown in both the Chinese economy and international trade. Second, the VAT increase in October will curb consumption during the year-end period and possibly in 2020 as well. Faced with these internal and external uncertainties, Japan will maintain accommodative monetary and fiscal policies, the effectiveness of which remains to be seen.
    At its September monetary policy meeting, the European Central Bank delivered a strong message. Through the broad mobilisation of its unconventional monetary policy tools, it aims to fulfil its mandate and reach its inflation target. At the press conference following the meeting, Mario Draghi seized the occasion to reiterate his call on certain eurozone governments to increase their fiscal support. The ECB is entering a long period in which it will have to remain mute, passing on the baton to the member states with comfortable fiscal leeway. This new round of monetary support is welcome considering the economic troubles facing the eurozone, although there are some doubts about its effectiveness.
    Weak data and business cycle indicators suggest that German economy would be in a mild technical recession. The weakness is mainly in the manufacturing sector and has hardly affected the rest of the economy. Despite calls from different quarters, the government is unlikely to launch a fiscal stimulus, beyond what is in the coalition agreement and the climate package. Simulations show that spill-over effects of a fiscal boost to other countries will be limited. Moreover, the implementation might be hampered because of long planning periods and bottlenecks in the labour market. Political tensions could increase after the SPD congress in December.
    The French economy continues to show proof of resilience judging from the stability of its GDP growth?–?at an annualised rate of just over 1%?–?and the relatively strong showings of confidence surveys and of the labour market. Although prospects are still favourable, the horizon has darkened in recent months with Germany showing signs of recession, the escalation of trade tensions and lingering uncertainty over Brexit. We expect business investment and exports to decelerate sharply under the weight of a more uncertain, less buoyant external environment. Yet the slowdown is likely to be offset by the expected rebound in household consumption, supported by major fiscal measures to boost household purchasing power.
    The new Government has approved the update of the economic and financial document, planning to raise the deficit to 2.2% of GDP in 2020. The 2020 Budget Law is estimated to amount to EUR 30 bn. Some measures contained in the budget, such as the cut of the fiscal wedge, are expected to sustain the economy with a positive effect on growth, despite an increasing uncertainty. In Q2, GDP increased by 0.1 y/y, as stocks negatively contributed to the overall growth, while exports continued to rise. Domestic demand suffered from the mixed evolution of labour market and the further delay of the full recovery of the housing market.
    Spanish voters will be called back to the ballot box on 10 November, but there is no certainty that the election results will pull the country out of its current impasse. The political landscape is still too fragmented to produce a lasting coalition. The line to follow in the face of Catalan independentism only exacerbates the divisions and helps justify the lack of co-operation. Meanwhile, growth has slowed somewhat more sharply than originally expected, although it is still holding around 2%, a performance that would be welcomed by many of the other big European economies. The elaboration and adoption of the 2020 budget bill will have to wait until a new government is formed.
    Belgian GDP growth is expected to come down from last year’s 1.4% to a mere 1% in 2019 and 0.7% in 2020. This reflects a further slowdown in international trade, which is only partially offset by resilient domestic demand. Despite a slowdown in job creation, a pickup in disposable income spurs on private consumption well into 2020. Public finance remains a key risk-factor with government debt in excess of 100% of GDP. Further fiscal slippage seems almost inevitable with government formation talks not yet near a conclusion.
    After its electoral success in late September, the conservative party (ÖVP) is expected to form a new government. To obtain a majority, the party could turn again to the FPÖ (far right). In that case, policies should remain largely unchanged and focus on fiscal consolidation and the reduction of the tax burden. The next government will face a less favourable economic environment. GDP growth could decelerate to around 1.2% in 2020. Nevertheless, public finances have improved considerably, giving the government sufficient leeway to fight a recession, if necessary.
    The economic slowdown has been very gradual so far, but it is expected to progressively spread during the second half of 2019 and in 2020. With unemployment at the lowest rate since 2002, households remain confident and have just renewed their confidence in Prime Minister Costa’s administration. After winning the legislative elections of 6 October with more than 36% of the vote, the Socialist party is preparing to form a new government with the support of the other left-wing parties.
    Finnish growth had only just regained some momentum in 2015 before slowing again in 2018. GDP growth is expected to weaken further in the quarters ahead. The country’s openness to trade exposes it to the deterioration of the global economic environment. Slower export growth and uncertainty linked to protectionist policies will undermine investment. Households, in contrast, should benefit from stronger wage growth. The unemployment rate has fallen to the lowest level since year-end 2008, and should continue to decline despite the slower pace of job creations.
    As we approach 31 October 2019, the latest deadline for the British exit from the European Union (Brexit), who can say where the UK is heading? Probably not the Prime Minister itself, Boris Johnson, who lost his majority in the House of Commons in an attempt to suspend discussions and fuelled scepticism among his European partners by presenting a take it or leave it ‘compromise’ on the Irish backstop that is hardly applicable nor acceptable. This would leave the Brexit end-point with no deal, although this has been prohibited by a law, or the more likely, but by no means guaranteed, outcome of a new extension accompanied by an early general election.
    The Norwegian economy is expected to report robust GDP growth through the end of 2019, thanks to dynamic oil sector investments in Norway and abroad. Growth is expected to slow thereafter in a less favourable international environment. Moreover, investment in the Norwegian oil sector is expected to ease up in 2020. However household consumption should continue to grow at a relatively sustained pace, buoyed by wage acceleration. The central bank of Norway will not opt for any further rate increases in the quarters ahead. Inflation should hold near the central bank’s target of 2%, while external risks are on the rise.
    10 July 2019
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    A sigh of relief followed the publication of first quarter GDP data. However since, growth concerns have picked up again on the back of a collection of new economic data but also — and perhaps more importantly — due to continued high uncertainty. The latter stems from concerns over the extent of the slowdown and its consequences in terms of economic risks. It also emanates from escalating tensions between the US and China over trade. The effects of this confrontation already show up in the Chinese data while in the US, mounting anecdotal evidence also point to its detrimental impact on business and the agricultural sector. The Federal Reserve has turned a corner and indicated that rate cuts are coming, much to the joy of the equity market. The ECB has also changed its message: with risks tilted to the downside and inflation going nowhere, it considers more easing is necessary.
    Although household consumption remained rather buoyant at springtime, foreign trade as well as investment may have weakened. In June, the business survey results were lacklustre, while the Federal Reserve opened the door to cutting interest rates. Already back on the campaign trail, President Trump is unlikely to soften his hard line on tariffs, although he will surely remain as unpredictable as ever. The economy is likely going to need some support.
    With the export sector hard hit by US tariff measures and private consumption growth weakening, investment growth has slowed. Although domestic demand could pick up in the short term, bolstered by monetary easing and fiscal stimulus measures, export prospects depend on the outcome of trade talks between Beijing and Washington, which remains highly uncertain. The authorities are bound to use foreign exchange policy sparingly to avoid creating a source of financial instability. Moreover, the current account surplus has improved again in recent months.
    Although Japan’s economic openness is relatively limited, the high concentration of Japanese exports to China, and the other Asian countries in general, creates a major external risk for the dynamics of Japanese growth. This situation is squeezing the manufacturing sector, but for the moment, its difficulties do not seem to have carried over to the other sectors of the economy. The VAT increase planned for October should encourage households to make some early purchases, while the high level of uncertainty is hampering corporate investment. In this environment, the Bank of Japan is expected to maintain a very accommodating monetary policy, although this is unlikely to trigger a sustainable upturn in price inflation.
    The months pass but nothing seems to change. Growth in the manufacturing sector is struggling to accelerate in a persistently uncertain international environment, while buoyant domestic demand is boosting activity in services. The stronger-than-expected first quarter performance sends a more optimistic message than economic surveys. Faced with a downturn in inflation expectations and the downside risks to the Eurozone’s economic scenario, the European Central Bank (ECB) has been proactive again. It is prepared to ease monetary policy further and the new measures have been set up much earlier than expected. Yet faced with stubbornly mild inflation and only limited manoeuvring room, the ECB is bound to take a frugal approach.  
    As international trade slows, the economy is mainly supported by expansionary fiscal and monetary policies and real disposable income growth. After a mild contracted in Q2, the economy is expected to grow modestly in the second half of the year. In 2020, exports may strengthen again and growth could return to close to potential. Due to its deep integration in global value chains, Germany is relatively hard hit by the global trade slowdown. This integration has undoubtedly brought benefits by improving productivity and skill-intensity. However, it has also accentuated income inequality.
    The signs of stabilisation seen at the beginning of the year have been followed by improvements in confidence surveys. The upturn in consumer confidence has been the most marked and the most encouraging of these. The rather more mixed nature of the economic data available tempers these positive signals somewhat, and leads us to forecast stable growth in Q2, at 0.3% q/q, making this the sixth quarter in a row to see growth at around this pace. This stability, which is remarkable in and of itself, is likely to continue over the coming quarters according to our forecasts. It is a good sign of the resistance of French growth to downward pressures. Under our scenario, this resistance demonstrates a degree of effectiveness in the measures taken to support consumers and businesses.
    In Q1 2019, Italy came out of recession. The overall scenario remained mixed. The GDP annual growth rate was negative. Imports strongly declined and exports slightly increased, with a positive contribution of net exports. Both households and firms remained cautious, postponing consumption and investment. Cyclical indicators suggest a disappointing evolution in coming months, making more challenging the fulfilment of public finance objectives. The Italian Government approved an update of the 2019 Budget, with the public deficit around 2% of GDP, reaching an agreement with the European Commission and avoiding the disciplinary procedure.  
    Spanish growth is still robust, but that does not mean it is totally immune to the European slowdown. Although growth is expected to slow this year, it should have no trouble holding above an average annual rate of 2%. After winning April’s legislative elections, Pedro Sanchez is still seeking a majority that would enable him to head the executive branch and form a new government. Spain officially exited the European excessive deficit procedure recently. Although a budget has not been formally adopted for 2019, the authorities are aiming for a primary surplus.
    GDP growth is slowing due to the strong deceleration in global trade. Nevertheless, the economy continued to operate close to its potential until 1Q 2019 thanks to the strength of domestic demand, underpinned by strong disposable income growth and an expansionary fiscal policy. As the government has lost its majority in the Senate, it needs the cooperation of the opposition parties for passing new legislation. However, a government crisis is not imminent. Even if GDP growth is expected to slow below its potential in the coming quarters, public finance metrics will continue to improve up to 2020.
    Over the next quarters economic growth will remain stable. Rising labour market capacity constraints and a lower contribution by net international trade are weighing on the overall outlook. With also uncertainties in the international (trade war, Brexit) and national (government formation talks) context unlikely to dissolve anytime soon, our base case is one of below potential growth up until 2020.
    The economic recovery continues. Growth is accelerating and for the moment it has reached the lower range of expectations. After four and a half years in power, Alexis Tsipras passes on the helm to Kyriakos Mitzotakis, leader of the centre-right New Democracy party, which has led in the polls since 2016. The new Prime Minister is unlikely to call into question the prescribed public finance trajectory as the country exits the European financing programme.  
    Brexit has been behind thirty-seven resignations from the government responsible for managing the process, the latest being that of Prime Minister Theresa May herself. Having failed three times to get the Withdrawal Agreement through Parliament, she had little choice but to ask for an extension of the Article 50 period and then in the end to resign. The two candidates to take her place are the current Foreign Secretary, Jeremy Hunt, and his predecessor, Boris Johnson. Whilst Mr Johnson claims he can negotiate a changed deal and trigger Brexit from 31 October 2019 (the latest deadline), Mr Hunt plans to seek more time in order to renegotiate to allow for an orderly exit.
    The robust GDP growth reported in 2018 is bound to slow this year. Sweden’s main trading partners have been hit by slowdowns, which is having a negative impact on export momentum. The slowdown in job creations will also strain household consumption. Yet it is the reduction in residential investment that is expected to curtail economic activity sharply in the months ahead. Although inflation should near the central bank’s 2% target by the end of the year, monetary policy will probably remain accommodating in the months ahead due to the uncertainty surrounding economic trends.
    Denmark’s small open economy is bound to be hit by the economic slowdown affecting its main trading partners in the quarters ahead. Household consumption will remain the main growth engine thanks to job creations, wage growth and mild inflation. With consumer prices up only 0.7% y/y in May, inflation should remain mild. The Danish economy is also expected to benefit from an accommodating monetary policy in the quarters ahead, although this will depend on the policy stance adopted by the European Central Bank (ECB).
    19 April 2019
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    Recent data in China and the eurozone point towards a stabilisation of growth and have been met with relief. Although the US economy is slowing, growth should remain at a satisfactory level in the near term. Yet there are lingering concerns about the underlying strength of the global economy. The IMF has again scaled down its forecasts and only expects a modest growth pickup later this year. The flattening of the US yield curve fuels worries that growth will disappoint. The Fed insists it is confident about the outlook and patient in setting its policy. Markets have welcomed this accommodative message. Yet the signals sent by equity and bond markets about future growth are quite different. It only adds to the list of concerns.
    Although losing steam, the economic activity in the US is seen keeping on a rather dynamic path in 2019. The International Monetary Fund still forecasts a 2.3% increase in GDP this year, while delivering an increasingly cautious message in the meantime. The IMF recently pointed out several risk factors, including the record high corporate debt ratio, the opacity and less stringent standards on the leveraged loan market, and stretched equity market valuations. Moreover, the inversion of the yield curve is virtually complete, which in the past has always been an early-warning sign of recession.
    The eurozone’s manufacturing sector has been hard hit by the decline in foreign trade and persistently high uncertainty. Very open internationally, the eurozone is sensitive to global cyclical slowdowns. Internal macroeconomic fundamentals are still solid, and the rally in the services sector is showing resilience. The ECB has taken note of the longer than expected slowdown, and has opted once again for longer-term refinancing operations (TLTRO). Numerous risks still cloud the forecast horizon, which could darken rather quickly if any of these risks were to materialise.
    Since the middle of 2018, economic activity has virtually stagnated largely because of a slowdown in world trade. The most recent surveys and hard data confirm that weakness in the manufacturing sector continued in Q1 2019. Spearhead of the economy, the sector can become a source of vulnerability when world markets are less buoyant. However, Germany is able to support domestic demand. In 2019, the government will return to households and businesses a part of last year’s record budget surplus (more than EUR 50 bn).
    Business confidence surveys are showing signs of levelling off. Hard data for January and February are rather positive. These factors are consistent with the economy keeping up growing at about 1.2%, which is our growth forecast for 2019. Although this is not very high, it is synonymous with the resilience the French economy is expected to show in an environment marked by uncertainties and downside risks. The main factor behind this resilience is the positive impetus of economic and fiscal policy, notably stimulus measures to boost household purchasing power, and the expected ensuing rebound in household consumption.
    The Italian economy entered the third recession in the last ten years. In 2018, value added in the manufacturing sector recorded four consecutive contractions. Domestic demand disappointed, as both households and firms remained extremely cautious. Given the deterioration of the overall scenario, in the 2019 Economic and Financial Document recently approved, the Italian Government has lowered from 1% to 0.2% the GDP growth expected in 2019, with public deficit at 2.4% and the debt to GDP ratio at 132.6%. The structural deficit would worsen by 0.1%, to 1.5%. A progressive ageing of the population makes the scenario even more complicated.
    In a morose economic environment, Spanish growth stands out as one of the most resilient in the eurozone, and it seems to have entered the year at a very similar pace to the one in H2 2018. The main factors behind this resilience can be found on the household front, where the savings rate has dropped back to the low point of 2008. With only a few days to go before the 28 April general elections, the electoral landscape is still highly fragmented. Regardless of the outcome, the winning party will find it hard to form a sustainable majority coalition.  
    Industrial enterprises were squeezed by tighter financing conditions in 2017 and early 2018, and then hit by a slowdown in production and revenue growth last year. These troubles have contributed to the deterioration of their payment capacity, resulting in a surge in defaults in the local bond market. The increase in defaults is an indicator of the financial fragility of corporates, and also seems to be going hand-in-hand with greater differentiation of credit risks by lenders and a certain clean-up of the financial sector. These trends are expected to continue in the short term as the authorities conduct a targeted easing of monetary policy. However, the persistence of the debt excess in the corporate sector will maintain high credit risks in the medium term.
    After nearly five years in power, Narendra Modi’s track record is generally positive, even though the last year of his mandate was tough, with a slowdown in growth in Q3-2018/19. The main growth engines are household consumption, and more recently, private investment, thanks to a healthier corporate financial situation, with the exception of certain sectors. In full-year 2018, external accounts deteriorated slightly as a swelling current account deficit was not offset by foreign direct investment. A big challenge for the next government will be to create a more conducive environment for domestic and non-resident investment.
    The hopes of seeing economic activity pick up following the election of Jair Bolsonaro have fallen. Some indicators point to a possible contraction in economic activity in Q1 2019 at a time where confidence indicators were seemingly improving. Meanwhile, the reform of the pension system – a cornerstone of President Bolsonaro's economic program – was presented to Congress in February where it is currently under discussion. Negotiations will likely be more protracted and be more difficult than originally expected. Indeed, since taking office, the popularity of the Brazilian president has sharply declined and relations between the executive and the legislature have strained.
    Economic growth slowed in the first months of 2019, and is now close to its potential growth rate of 1.5% according to the central bank. A 2-point VAT increase on 1 January has strained real wage growth and sapped household consumption. Inflation (5.2% year-on-year in February) is still below the central bank’s expectations, and the key policy rate was maintained at 7.75% following the March meeting of the monetary policy committee. In the first two months of 2019, investors were attracted by high yields on Russian government bonds, despite the risk of further tightening of US sanctions. The rouble also gained 5% against the US dollar in Q1 2019.
    Economic activity in Japan remains in a slump, and the slowdown observed in 2018 seems set to last. Manufacturing activity deteriorated in the first quarter. In the short and medium term, Japan will continue to be hard hit by the slowdown in China, its main trading partner. Demographics are still a major problem in a country where the over-65 age group continues to swell and now accounts for more than a quarter of Japan’s total population. It serves as a constant incentive to boost productivity gains through large-scale structural reforms in the goods and services markets as well as in the labour market.
    By opting to leave the European Union (EU) without any exit plan, the United Kingdom has come face to face with an impossible choice. Week after week, the Brexit impasse has revealed the British Parliament’s incapacity to make decision, starting with the ratification of the divorce terms, the fruit of 2-years of negotiations by Prime Minister Theresa May. In the end, the Brexit was simply postponed. First set for 29 March, then 12 April, the deadline for exiting the EU has now been extended to 31 October (a Halloween treat?). This date could be moved forward if the UK finally manages to ratify the withdrawal agreement, which it has rejected time and again. But the most probable scenario is that the UK will extend its participation to the EU, at least for a while…
    24 January 2019
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    The slowdown is spreading widely. Although it is reasonable to expect growth to normalise, several sources of uncertainty (fears of a trade war, Brexit, the US government shutdown, etc.) are acting as headwinds. China has already announced new measures, and in the United States, the Federal Reserve is insisting on its patience (concerning inflation) and flexibility when it comes to adapting monetary policy.
    The assumption that the US economy is heading for a landing is gaining ground, not just because of the shutdown. The disruption created by the trade war with China, the appreciation of risk on bond and equity markets, the peaking of the energy sector and the deterioration of real estate indices all suggest less buoyant growth. This view is shared by the US Federal Reserve, which has adopted a more cautious tone and suspended the increase in policy rates pending future macroeconomic data.
    After an eventful first twenty years, the eurozone is moving into a new phase of uncertainty. Growth has slowed markedly, and economic indicators have deteriorated. With temporary shocks and structural drags on growth, 2019 brings numerous risks. Against this background, and faced with underlying inflation that remains too low, the European Central Bank (ECB) is taking a cautious approach to this new year.
    Economic growth has slowed markedly since the second quarter of 2018 and business surveys indicate that it is unlikely to change in the coming months. The exporting manufacturing sector is much affected by the slowdown in world trade. In the coming quarters, the domestic economy is likely to become the major engine behind growth thanks to an expansionary fiscal policy. More fiscal stimulus could be expected if the economy would slow further. This would also shore up the chances of the coalition parties at the next federal election set for 2021.
    2019 is getting off to a less strong start, with economic activity having taken a hit from the ‘gilets jaunes’ protest movement. The collapse in consumer confidence has been abrupt and the global environment looks less certain. Against this background, fiscal policy is being loosened: the new plan to support the purchasing power of lower income households, announced in response to December’s demonstrations, should help consumer spending to catch up, at least in part. It comes alongside measures already introduced in the 2018 budget to support consumers and companies. French growth is therefore likely to show signs of resistance.
    At the end of 2018, Italy and the European Commission agreed on a new 2019 Budget Law, avoiding an Excessive Deficit Procedure. The 2019 public deficit has been lowered to 2% of GDP from 2.4% previously planned, and real GDP growth has been revised downward to 1% from +1.5%. This is still a challenging scenario as overall conditions in the Italian economy worsened in H2 2018. In Q3, GDP fell by 0.1% as investment, both private and public, significantly declined. After the downturn in September, exports in Italy recorded a +9.6% y/y increase in October, while they stagnated in November bringing the value of the sales abroad to 427 billion euros in the first eleven months of the year.
    The current slowdown is in keeping with the European economic cycle. Prospects are still looking relatively good, and Spain’s expected growth rate is among the highest of the big eurozone countries. Unemployment is falling rapidly but it is still massive, especially long-term unemployment. Prime Minister Pedro Sanchez just presented his 2019 budget proposal to Parliament, but he is not sure it will pass. In any case, the deficit most likely slipped significantly below 3% of GDP in 2018, and Spain is preparing to exit the excessive deficit procedure that was launched 10 years ago.
    Economic growth slowed to 6.6% in 2018 from 6.9% in 2017 and should continue to decelerate in the short term. The extent of the slowdown will depend on the still highly uncertain evolution of trade tensions between China and the United States as well as on Beijing’s counter-cyclical policy measures. However, the central bank’s manoeuvring room is severely constrained by the economy’s excessive debt burden and the threat of capital outflows. Moreover, whereas Beijing has pursued efforts to improve financial regulation and the health of state-owned companies over the past two years, its new priorities increase the risk of interruption in this clean-up process. Faced with this situation, the central government will have to make greater use of fiscal stimulus measures.
    India’s economic growth slowed between July and September 2018, hard hit by the increase in the oil bill. The sharp decline in oil prices since October will ease pressures, at least temporarily, on public finances and the balance of payments, and in turn on the Indian rupee (INR), which depreciated by 9% against the dollar in 2018. In a less favourable economic environment, Narendra Modi’s BJP party lost its hold on three states during recent legislative elections.
    The election of Jair Bolsonaro at the presidency of Brazil has marked a swing to the right, the weakening of traditional political parties and a return of the military to national politics. The new administration faces the challenges of rapidly engaging its fiscal reform, gaining the trust of foreign investors while reconciling ideological differences across its ranks. How society will adjust to a new era of liberal economic policy remains the greatest unknown. Meanwhile, the economy is still recovering at a slow pace. Supply-side indicators continue to show evidence of idle capacity while labour market conditions have yet to markedly improve. Sentiment indicators have shown large upswings in recent months which should help build some momentum in economic activity over Q1 2019.
    In 2018, Russia swung back into growth and a fiscal surplus, increased its current account surplus and created a defeasance structure to clean up the banking sector. The “new” Putin government affirmed its determination to boost the potential growth rate by raising the retirement age and launching a vast public spending programme for the next six years. Yet the economy faces increasing short-term risks. Monetary tightening and the 1 January VAT increase could hamper growth. There is also the risk of tighter US sanctions, which could place more downward pressure on the rouble.    
    On 15 January 2019, UK MPs rejected the proposed Brexit agreement reached by EU Heads of State two months earlier. With 432 of the 634 votes going against the deal, this result has significantly weakened Prime Minister Theresa May in future discussions with the EU and with Members of Parliament. Today almost anything looks possible, starting with a delay in the official date of the UK’s departure, currently scheduled for 29 March.
    The COP24 only succeed in agreeing on rules on measuring, reporting and verifying carbon emissions. In the meantime, the world is falling behind the objective to limit global warming to 1.5°C. CO2 emissions are set to rise to 2030, whereas they should peak by 2020. Countries are underestimating the urgency for action or held back by commercial interests. Moreover, environmental legislation is met by growing public resistance. It demands a better framing of climate policies. Moreover, the climate change discussion should be broadened to the WTO.
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